Position under the Service Tax Regime
- In the year 2017, the Central Government had issued notifications levying Service Tax on ocean freight chargeable on import of goods. These notifications were challenged by a number of Petitioners inter alia on the ground that such notifications were ultra vires to various provisions of the Finance Act 1994;
- As a leading matter, in the writ petition filed by Sal Steel Limited [Special Civil Application No. 20785 of 2018] before the Hon’ble Gujarat HC, it was held that the notifications levying Service Tax on ocean freight are ultra vires to Sections 64, 66B, 67 and 94 of the Finance Act in as much as they sought to levy tax on transactions being carried out beyond the territories of India.
Position under the GST Regime
- With the introduction of the GST Law in July 2017 which inter alia subsumed the Service Tax Law, the turmoil created by the above referred Service Tax notifications persisted. The Central Government had issued Notification No. 8/2017 - Integrated Tax (Rate) dated 28 June 2017 ('NN.8/2017'), notifying the rate of IGST for the services described therein along with the applicable conditions;
- Meanwhile, Notification No. 10/2017 - Integrated Tax (Rate) dated 28 June 2017 ('NN.10/2017'), (NN.8/2017 and NN.10/2017 collectively referred to as 'impugned notifications') was issued notifying the categories of supplies which are liable for payment GST under Reverse Charge Mechanism ('RCM'). The entry number 10 of the said notification provided for payment of GST on ocean freight by the importer (Services supplied by a person located in non - taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India);
- The introduction these notifications led to the following confusions and difficulties amoung all the stakeholders:
- Double taxation on ocean freight on import of goods as the IGST component already includes cost of freight and then agan levy of IGST on RCM basis;
- How can the liabilty of IGST be imposed on the importer who is not the recipient of services;
- Whether the Input Tax Credit ('ITC') can be availed on discharging off IGST on RCM basis
The Present Ruling in Mohit Minerals Private Limited vs. Union of India
The Petitioner had challenged the levy of the IGST on the estimated component of the Ocean Freight paid for the transportation of the goods by the foreign seller as sought to be levied and collected from the Petioners as the importer of the goods. The Petitioner inter alia submitted that:
- IGST is paid along with customs duty on import, the said value includes ocean freight. Dual levy of the IGST cannot be imposed on the same freight amount;
- In the present set of facts, undisputedly, both the service provider and service recipient are outside India. Further, the IGST Act, extends to the whole of India. Accordingly, such levy of tax which takes place outside India cannot be brought under the ambit of the IGST Act and therefore the impugned notifications lack legislative competency and are liable to be quashed;
- In case of Free on Board ('FOB'), the importer pays IGST on the imported goods which includes the cost of freight. Further, in case of CIF, the cost includes the sum of cost, insurance and freight. Accordingly, the levy of additional IGST on the same freight component is impermissible under the law and therefore the impugned notifications are illegal and unconstitutional;
- The levy under the impugned notifications is contrary to the provision of composite supply, which provides that where the goods are supplied with transportation, insurance, etc., the principal supply would be goods. Accordingly, the Ocean Freight cannot be taxed as a separate supply under the impugned notifications;
- The levy of IGST on ocean freight is on the basis of the deeming fiction for the 'value of taxable service' as 10% of the CIF value of the imported goods. In case of CIF contracts, the importer is unaware and least concerened about the freight charges whatsover, since it is the responsibility of the supplier outside India. Further, through the delegated legislation there cannot be a deeming fiction to ascertain the value on which the tax is payable as it is an essential legislative function;
- Under the impugned Entry 10 of the NN. 10/2017, the tax liability has been shifted on the 'importer' and not on the 'recipient'. As a settled princicple of law, any vagueness of the person on whom the levy is imposed and who is obliged to pay the tax make the levy fatal;
- The ‘scheme of classification of services’ or ‘description of services’ etc. are essential functions of the Parliament, which has not been delegated by the Parliament. However, such power has been assumed by the Central Government while issuing the impugned notifications. Thus, the Notification is beyond the scope of the IGST Act;
- The impugned notifications have been issued under various provisions of the IGST Act. However, none of those provisions empower the issuing authority to issue rate notifications. Accordingly, the impugned notifications are beyond the scope of the Act;
- The impugned notifications specify conditions on availment / denial of ITC. Such conditions are directly in conflict with Sections 16 and Section 17 respectively of the CGST Act, 2017, which deal with the conditions of eligibility of availment of the input tax credit;
Whereas, the Revenue contended that:
- During the Service Tax regime, the Ministry of Finance had received various representations from the Indian shipping lines stating that in view of the levy of service tax on the inward transport, the FOB contracts were being converted to the CIF contracts and those were being entered into in a non-taxable territory (i.e. outside India). Accordingly, to ensure the sufferance of Service Tax by both Indian and foreign shipping lines, on the inward transportation goods, the importers are sought to be made liable to pay tax, as it was not possible to collect it from the foreign shipping lines entering into a contract with a foreign supplier for transportation of goods to India;
- The notification is ot arbitrary and is aimed at providing level playing field to the Indian Shipping Lines;
- The levy introduced by way of impugned notifications on the import of freight service does not result in additional cost to the importer as the GST paid by the importer on the inward transportation of goods as well as on the import freight services is available to them as ITC
Taking cognizance of the submissions made by both the sides, the Hon'ble Gujarat HC made the following observations:
- The charging section i.e., Section 5(3) of the IGST Act provides for the collection of tax under the reverse charge basis only from the recipient of supply. However, as per the relevant definitions, the Petitioner cannot be said to be the recipient of services. Accordingly, the Applicatnt cannot be made liable to pay tax on some supposed theory that the importer is directly or indirectly recipient of the service. The term 'recipient' has to be read in the sense in which it has been defined under the Act. There is no room for any interference or logic in the tax laws;
- The impugned notifications levying tax on supply of service of transportation of goods by a person in a non-taxable territory to a person in a non-taxable territory from a place outside India upto the customs station of clearance in India and making the petitioner, i.e. the importer, liable for paying such tax, are ultra vires the provisions of the IGST Act;
- There is no provision to determine the place of supply in case where both the supplier and the recipient are located outside India. Ocean freight service is neither covered under section 7 nor covered under section 8 of the IGST Act, hence not leviable to tax;
- There is no provision to determine the time of supply of the ocean freight service. The person other than the recipient of supply cannot determine the time of supply as provided under section 13 of the IGST Act;
- Even the provisions relating to the returns apply where either the person is a supplier or a recipient of the supply. If the person is neither a supplier nor a recipient of supply, such provisions do not apply.
The Hon'ble Gujarat HC further beautifully captured the rationale for not levying service tax on ocean freight services. It was clarified that the value of the imported goods for the purpose of payment of customs duties includes the amount of freight paid on their inward transportation. The tax on such transportation service, instead of being collected from the supplier of service is collected from the importer of goods by including the same in the value of imported goods.
Basis the above observations of the Hon'ble Gujarat HC declared the impugned notifications to be unconstitutional, lacking legislative competency.
Way Forward
As a result of this judgment, the provisions levying IGST on ocean freight have been held redundant. Accordingly, the fate of ITC availed by importers, who had abided by the impugned notifications, is at stake. Accordingly, it is contemplated that:
- The Revenue may file a Special Leave Petition (‘SLP’) before the Hon’ble Supreme Court against the present judgment of the Hon’ble Gujarat High Court seeking to quash the same. However, the sustainability of SLP would be doubtful as the present judgment of the Hon’ble Gujarat High Court has been reasoned in great caution and detail;
- The Revenue may issue a retrospective notification to levy the burden of IGST on ocean freight on the importer instead of the recipient. Such step by the Revenue is quite plausible, especially in light of the recent issuance of Notification No. 49/2019 – Central Tax dated 09 October 2019, which was issued to negate the judgment of the Hon’ble Gujarat HC in the case of AAP & Co. vs. Union of India [R/Special Civil Application No. 18962 of 2018] wherein it was held that GST-3B is not a return. Accordingly, in case any retrospective notification is issued levying the burden of IGST on ocean freight on the importer, it would essentiality negate the present ruling of the Hon’ble Gujarat HC.